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About Face! Goldman Sachs Goes From Bearish to Bullish on Oil

Phew! Goldman Sachs (GS) says it's safe to get back into the oil patch. After warning last month that the price of crude was set to fall amid rampant speculation in the sector, the investment bank now speculates -- sorry, forecasts -- that oil is on the way up again:

While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand.
What changed? Goldman thinks that slowing production in Libya and rising global demand for the black stuff will "tighten the oil market to critically tight levels" early next year. Crude prices today responded like a yo-yo, immediately bouncing up 2.5 percent. Boooinnnng!

It's worth noting that commodities markets are known for jumping around, especially as Wall Street has gotten ever more artful at betting on everything from pork bellies to copper. Still, weren't the same factors Goldman analysts cite in predicting that 12-month oil prices will rise to $130 a barrel already present six weeks ago, when they said it would pull back to $105? Libya was in flames then, just like now. Same goes for OPEC's ability to make up for that lost production. Is the world so different today than it was in mid-April?

Here's how Forbes' Agustino Fontevecchia describes Goldman's about-face, with the business pub saying the bank is playing "oil like a fiddle":

What Goldman Sachs' commodities team has noticed is a structural shift in the underlying dynamics of the oil market. Fear that additional supply shocks could push even more production out of the market, along with rising production costs, helped price in a $10 per barrel risk premium, which, after fears of demand destruction took hold, has come out of the market with the recent pullback. Oil markets are now "being driven by the anticipation of continuing demand growth against forward supply constraints, rather than concerns over transient supply shocks."
Or maybe it's that all the speculators have fled, fearful of getting trampled by the dumb money skittering this way and that. Indeed, the "s-word" doesn't figure once in Goldman's 27-page research note.

Of course, Goldman turned out to be right in calling a top to the commodities market. Funny how that happens.


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